Court Rules on Method for Calculating Damages

What is the proper method for calculating the value of work performed and lost profit damages where a contractor is wrongfully terminated? What is the measure of damages to the owner of a project where the contractor willfully and intentionally exaggerates its mechanic’s lien? Both questions were recently addressed by an appellate court in Abra Construction Corp. v. 112 Duane Associates, LLC.

Background

Abra Construction Corp., a contractor, entered into a construction agreement with 112 Duane Associates, LLC, an owner. After working on the job for approximately two months, the owner terminated the contractor. Disputes arose over the propriety of termination and the amount due to the contractor. Since the parties were unable to resolve their disputes, the contractor filed a mechanic’s lien against the project and commenced a mechanic’s lien foreclosure action.

The owner defended the foreclosure action on the grounds that termination was proper, and, the owner argued that even if the termination was improper, the amount of the contractor’s mechanic’s lien was willfully exaggerated. The contractor argued that termination was improper, that it was entitled to its lost profit because of the wrongful termination, and that the mechanic’s lien was not willfully exaggerated since, according to the contractor, it was entitled to file a lien for the percentage of its contract based on overall project completion. In other words, the contractor argued that if the project was 50% complete, it could file a lien for 50% of its contract value, regardless of the extent of the work actually performed by the contractor. The percentage of completion method used by the contractor for calculating the value of its work was inaccurate because the contractor failed to establish substantial completion of the contract as a whole. In addition, according to the court, the completion-percentage method was rejected because the contractor sought to obtain the benefit of the percentage of completion of work performed by other subcontractors, for which the contractor did not pay them.

The trial court properly calculated the value of the work performed by using the contractor’s payroll records, adding reasonable percentages for the cost of labor, overhead and profit, and adding to that figure the amount of proven cost of the contractor’s materials.

Decision

The appellate court affirmed the trial court’s decision. In so doing, the court first noted that under the mechanic’s lien law a contractor is only entitled to file a lien for the value of labor and materials it provided to the project. The court held that the evidence amply supported the trial court’s finding that the contractor had willfully and intentionally exaggerated its mechanic’s lien since the contractor knew that the amount of its mechanic’s lien was unrelated to the value of labor and materials it actually furnished to the project. The court pointed out that the amount of the lien was almost seven times the amount due and owing to the contractor.

The court noted that the penalty for filing a willfully exaggerated lien is the difference between the lien as filed and the amount due to the contractor. Based on the court’s findings, the contractor’s lost contract profit of $294,808.20, which was awarded to the contractor because it was wrongfully terminated, was reduced by $243,808.20, which was the amount by which the court determined the contractor’s lien had been willfully exaggerated. According to the court, rather than receiving its lost profits of $294,519.05, the contractor was only entitled to recover $50,710.85 because it filed a willfully exaggerated lien.

Comment

As illustrated in this case, the value of work performed and lost profit are properly awarded when a contractor is wrongfully terminated. As further demonstrated, however, mechanic’s liens are intended to secure the value of labor and materials actually furnished to a project. The filing of a willfully exaggerated mechanic’s lien subjects a contractor to harsh penalties, which includes liability to the owner for the amount of the exaggeration, the amount of the owner’s attorneys’ fees, and the costs of discharging the lien by a discharge bond or otherwise. Contractors should be careful to ensure that the amount of their lien is limited to the value of labor and materials actually furnished to the project.

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